Sickness survivors spark an epidemic of premium rises

There's a price to be paid for a surge in claims on critical illness cover, writes Clare Francis

As the number of claims rises and speculation grows about future advances in medical science, so premiums for critical illness cover (CIC) are rising.

CIC pays out a tax-free lump sum if you are diagnosed with a life-threatening condition, giving you financial help if you're unable to work due to illness. Tomorrow, two more insurers will be hiking up the cost of their cover: Swiss Life's policies will increase by about 20 per cent, and Legal & General's by between 20 and 25 per cent. But such increases look restrained compared to those of 60 per cent announced last month by Scottish Equitable and Norwich Union, and the 50 per cent rises already imposed this month by Bupa and Friends Provident. Liverpool Victoria is also planning an increase next month, although it has not yet announced what this will be.

Developments in medical science are shaking up the insurance industry as people survive illnesses that would have killed them 10 years ago. As a result, insurers are having to pay out more often on critical illness policies, while life assurance claims have decreased. The knock-on effect for consumers is that the cost of CIC is soaring while that of life cover is falling.

To try to curb the soaring cost of premiums, the Association of British Insurers has revised the terms under which cover is provided against both heart problems and prostate cancer.

Early detection of these conditions has meant that, for many sufferers, they are no longer life threatening. So redefining the terms under which CIC policies will pay out should help to reduce the number of related claims and thus control premium increases. (Similarly, skin cancer has to be "invasive" before it can be covered by a critical illness policy.)

"Although this type of insurance was originally known as 'dread disease', many of the conditions currently covered by critical illness policies are becoming quicker and easier to detect and treat," says Kevin Carr at broker LifeSearch. "Hence insurers have recently found themselves paying out on claims where the condition was not life threatening, which isn't the purpose of the policy."

In future, insurers are likely to review the terms of their policies more frequently. As of tomorrow, Swiss Life will be removing diabetes from its CIC, leaving Bupa the only insurer still including it. An increasing number of insurers are also offering reviewable policies, under which both the premiums and the illnesses covered are reviewed every five years.

Most people with CIC have a guaranteed policy which runs for a set term – normally the term of their mortgage – with premiums that stay the same while the cover is in force. But it is this type of cover that is becoming more expensive.

"At the end of the day there's a price to be paid for the peace of mind a guaranteed policy gives," says Rye Mills, group director of the independent financial adviser division of Liverpool Victoria. But he adds that as the difference between the cost of guaranteed and reviewable policies grows, people are more likely to opt for the latter.

Tomorrow, while increasing the cost of its guaranteed CIC, Legal & General also launches a reviewable policy to give customers an alternative. Scottish Widows offers only reviewable cover and Skandia withdrew its guaranteed CIC at the beginning of the month.

"The reviewable price will be typically [around] 15 per cent lower than the guaranteed cover," says Ronnie Martin, protection director at Legal & General.

If you've already got guaranteed CIC, you don't have to worry: once a policy is in force the terms cannot be amended, so your cover won't be altered to include new definitions of illnesses. And even though the premiums on reviewable policies are likely to be cheaper, LifeSearch's Mr Carr believes most people would rather have a guaranteed product. If this is how you feel, and you don't yet have cover, he suggests you take it out now, before more changes are announced.